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Recently the European Commission has published the EU’s political priorities and guidance for 2024-2029; they have shown the following min strategic priorities: green growth (so-called green deal), digitalisation, attracting investments, strengthening the EU’s role in the world, as well as protecting the rule of law and democracy. However, two independent reports prepared by Draghi and Letta this year have revealed slightly different directions for the European perspectives…
Introduction
There has been for decades a wide gap in GDP between two main competing powers, i.e. the EU and the US; e.g. on a per capita basis, real disposable income has grown almost twice as much in the US as in the EU since the beginning of this century. As experts preclude, “the foundations on which the EU growth is built are now being shaken”; there are various factors supporting this conclusion: e.g. the era of rapid world trade growth looks to have passed, the EU companies are facing both greater competition from abroad and lower access to overseas markets. Europe has abruptly lost its most important supplier of cheap energy from Russia; and technological change is accelerating rapidly. But fossil fuels will continue to play a central role in the global energy pricing at least for the remainder of this decade.
Sadly enough, the EU states have largely missed out on the digital revolution led by the internet and the productivity gains associated with the process: in fact, the productivity gap between the EU and the US is largely explained by the deficiencies in the digital and technology’s sectors. Besides, the EU is weak in the emerging technologies that will drive future growth in the member states. Only four of the world’s top 50 tech companies are European. Generally, the present geopolitical instability has turned the EU-wide dependencies into political-economy’s vulnerabilities.
The last assessment commissioned by the EU was in 2010 by the Monti Report which provided for some critical reassessments and set forth recommendations for the single market’s re-invigoration.
All references and citations from the Draghi report (2024) in: https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en; as well as in the related links: https://commission.europa.eu/topics/strengthening-european-competitiveness_en
Note. Preliminary accounts of the Draghi report from several sides have shown that the report is valued expensively; it is even regarded as the most comprehensive modern analysis of the EU-wide perspectives; some even say that it would serve as the “Bible of the EU integration”. Thus, e.g. recent Renew Group’s publication, including MEP’s M. Lokkegaard (Venstre, Denmark’s liberal party), the Renew Europe Vice-President noted: “Draghi’s report portrays a European economy unable to unleash its full potential due to the huge market fragmentation and lack of strategic reforms, which puts severe strains on competitiveness, discourages business growth facing major global players. Without a firm commitment to innovation, better-integrated capital markets and a deepening of internal market, it will be increasingly difficult to adequately invest in the growing EU priorities: from energy security and climate change to defence, industrial competitiveness and health. It is time to act and go hand in hand in this transformation with citizens and businesses”.
In: https://www.reneweuropegroup.eu/news/2024-09-17/call-to-future-eu-commissioners-draghis-plan-must-be-your-bible?
Additionally, our Institute’s article in: https://www.integrin.dk/2024/09/09/eu-wide-competitiveness-challenges-and-perspectives-in-draghi-report/
Draghi’s vision on inspiring future growth: three areas
= First, and most important issue is the EU’s profound refocusing its collective efforts on closing the innovation gap with the US and China, especially in advanced technologies. There are numerous components in this agenda: including “static industrial structures” and lack of trained personnel.
= The second area for action is a joint plan for decarbonisation and competitiveness.
If Europe’s ambitious climate targets are matched by a coherent plan to achieve them, decarbonisation will be an opportunity for Europe. But if we fail to coordinate our policies, there is a risk that decarbonisation could run contrary to competitiveness and growth.
Even though energy prices have fallen considerably from their peaks, EU companies still face electricity prices that are 2-3 times those in the US. Natural gas prices paid are 4-5 times higher; this price gap is fundamental and primarily driven by Europe’s lack of natural resources. Besides, common energy market rules prevent industries and households from capturing the full benefits of clean energy in their bills. High taxes and rents captured by financial traders raise energy costs for developers.
= The third area for action is that of increasing security and reducing dependencies: the EU member states are particularly exposed to these challenges. E.g. the EU heavily relies on a handful of suppliers for critical raw materials, especially China, even as global demand for those materials is exploding owing to the clean energy transition. Besides, the member states are also hugely reliant on imports of digital technology: e.g. for chips production, 75-90% of global fabrication capacities are in the Far East and Asia.
The reformed strategy and resources needed attracted Draghi’s attention: to sustain European future growth and socio-economic development, enormous resources are needed; some say that they are hardly accessible presently. For comparison, investment under the Marshall Plan after WWII (during 1948-51) was equivalent to 1-2% of EU GDP. Delivering this increase would require the EU’s investment share would increase from around 22 percent of GDP today to around 27 percent in a couple of years. As experts note, this calculus reflects reversing a multi-decade decline among most EU’s largest economies.
Many European entrepreneurs prefer to seek financing from US venture capitalists and scale up in the US market. Between 2008 and 2021, close to 30% of the “unicorns” founded in Europe – startups that went on to be valued over $1bn – relocated their headquarters abroad, with the vast majority moving to the US.
Note. Mario Draghi, an Italian economist, academic, banker, statesman and civil servant who served as the prime minister of Italy from February 2021 to October 2022.Before that he served as President of the European Central Bank between 2011- 2019; he was also Chair of the EU’s Financial Stability Board (2009-2011) and Governor of the Bank of Italy (2006-2011).
Source: https://en.wikipedia.org/wiki/Mario_Draghi
Attention to the single market: Letta’s report
The EU single market has been the backbone of the European long-term integration process during over seven last decades, with the four basic “freedoms” of movement: for goods, people, services and finances. The Single Market has always been and will continue to be the core and the engine of European Union integration. As Mr. Letta confirms, “to develop an efficient integration capable of creating conditions for the European prosperity”, it is necessary to “engage everyone”: the EU institutions, the member states, businesses, citizens, workers and civil society to play their own role; failure of any one to play their part is equivalent to failure of the whole chain.
More in: https://commission.europa.eu/strategy-and-policy_en
In April 2024, Enrico Letta delivered a report (commissioned by the EU institutions) on the future of the EU Single Market, which shows the ways the EU Single Market shall adapt to the modern “large world”. Thus, Mr. Letta rightly draws attention to the worrying trend of companies and investment leaving the European Union due to an overly complex and bureaucratized regulatory framework, which is also a source of fragmentation; hence the simplification of EU rules is urgent. However, the EU member states should discuss the coordination on their structural reforms: the EU single market can only deliver on its huge potential if the states adopt necessary reforms in energy, labour markets, education and other areas which are largely the responsibility of the states.
The report gives direction on issues of key concern for business with the further integration of the network industries and financial markets; the report’s proposals contribute to EU-wide reforms towards increasing competitiveness.
The basic principles of the European “social market model” (inaugurated by Jacques Delors in 1985) is the EU-wide commitment to robust social dialogue; however recently the essence of these dialogues has somewhat weakened. On the contrary, the need for coordination and negotiation mechanisms between employers and workers must be increased to support businesses and create quality jobs. Social dialogue and collective bargaining remain unique tools for governments and social partners to find targeted and fair solutions. It is essential to acknowledge the important role played by social partners in addressing modern challenges, such as climate change and digitalization and revitalizing the EU Single Market (EUSM).
Letta’s main factors in updating EUSM
= Changes in the global demographic and economic situation. During last three decades, the EU’s share of the global economy has diminished, acknowledges E. Letta: the trend is partially driven by demographic changes, with the EU facing a shrinking and ageing population. In contrast to the growth observed in other regions, the birth rate in the EU “is alarmingly declining, with 3.8 million babies born in 2022, a decrease from the 4.7 million births recorded in 2008”. Even without considering accelerated growth of Asian economies, the EUSM is lagging behind the US market: in 1993, the two economic areas had a comparable size; however, while GDP per capita in the US increased by almost 60% from 1993 to 2022, in European share increased by less than 30 percent.
= Changes in the rule-based international order. The EU has traditionally committed to multilateralism, free trade and international cooperation’s principles which have formed the bedrock of global governance and EU’s economic strategies. These principles have steered the EU’s interactions on the international stage, fostering a rule-based order in its operational framework. However, wars and trade conflicts are increasingly undermining the principles of a rules-based international system, posing significant threats to the very foundation upon which the EU has constructed its external relations and policies. However, the EU must work in modern complex international framework with the goal of preserving peace and upholding the rule-based international order, while also guaranteeing the EU-wide economic security. In this regard it is essential to continue investing in the enhancement and promotion of European standards, reinforcing the Single Market’s role as a robust platform that supports innovation, safeguards consumer interests and promotes sustainable development.
= Addressing crucial “perimeter’s dimension” of the EUSM. At the SM’s inception, the three sectors were “deliberately kept outside the integration process”: i.e. financial sector, electronic communications and energy. The exclusion at the time, underlines Letta, was motivated by the belief that prioritized domestic control over these areas would better serve EU’s strategic interests. However, national markets, initially designed to protect domestic industries, now represent a major brake to growth and innovation in sectors where global competition and strategic considerations call for swiftly moving to a European scale. Hence, the EUSM needs an overhaul: particularly, the intra-EU provision of services continues to encounter significant barriers that need to be addressed and removed to unlock the full potential of the EUSM.
Bottom line: the Letta report has systematically analyzed the key challenges facing the single market and provided vital recommendations.
More in: Letta E. “Much more than a market: speed, security, solidarity in empowering the Single Market to deliver a sustainable future and prosperity for all EU citizens”, Report to the European Council (April 2024) in: https://www.consilium.europa.eu/media/ny3j24sm/much-more-than-a-market-report-by-enrico-letta.pdf
Note. Letta E. is President of the Jacques Delors Institute, former Dean of the School of International Affairs at Sciences Po Paris and former Italian Prime Minister (April 2013-February 2014). He has also been a member of the Chamber of Deputies (2006-15), country’s minister of European Affairs (1998-1999) and minister of industrial development (1999-2001), as well as the Secretary to the Council of Ministers (2006-2008). He is also a founding member of the Democratic Party and was holding the party’s leadership in 2021-23.
Source: https://commission.europa.eu/enrico-letta_en; https://en.wikipedia.org/wiki/Enrico_Letta